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Non-Regular Employment and Inequality among Workers: Institutional reform toward equitable treatment

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After sinking into prolonged recession in the 1990s, the Japanese economy has fully readjusted itself and now needs to leap toward new frontiers by overcoming the challenges posed by decreasing population. In order to do this, growth potential driven by human capital must be strengthened. The future of Japan, scarce in natural resources, hinges on "human power."

In the labor market, the proportion of non-regular workers is increasing rapidly as employment diversifies both in terms of workers' attributes and work styles. Inequality between regular and non-regular workers has come to the fore as a major challenge along with the conventional issues of labor supply and demand and the problem of unemployment. For regular workers, who are supposedly the winners in all this, the problem of long work hours is becoming serious. As a step toward solving these problems, it is necessary to develop new institutions and mechanisms that enable individuals to find greater motivation for work and improve their capabilities.

The government's Council on Economic and Fiscal Policy proposed the "Labor Big Bang" in the autumn of 2006, holding discussions on the formulation of labor contract law as well as on the possibility of introducing a system to accommodate flexible work schedules for qualifying white-collar employees by exempting them from labor-hour restrictions. It had seemed that comprehensive and fundamental labor law reform was gaining momentum, but unfortunately, thorough and constructive discussion failed to occur as labor-management confrontation continued and the mention of labor law reform became a political taboo. Employment and labor issues taken up for discussion thereafter seem to be disproportionately concentrated on the agreeable issue of "work-life balance."

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The Labor Big Bang may have provoked backlash as it was taken as reform needed to make the labor market more efficient and ensure proper functioning of the market mechanism. Indeed, there is deep-seated belief that people are not commodities and the labor market must not be treated in the same way as other markets where commodities are traded. However, because the price of labor services is basically determined by supply and demand, it is difficult to refute the role of the market mechanism. When the market mechanism becomes the focal point of this type of confrontation, discussion goes nowhere.

The confrontation arises between economists, who focus on the efficiency of resource allocation, and law scholars, who prioritize the protection of individual workers' rights, fairness, and justice. The branch of economics that focuses on institutions, such as with comparative institutional analysis, can help find a meeting point between these two groups; seeing institutions as an underlying infrastructure that enables any market to function properly. From this perspective, "labor market institutions reform" - rather than "labor market reform" - should be the pursued goal. Based on this thinking, RIETI recently held a Policy Symposium titled "Labor Market Institutions Reform in Japan: Changing the Way People Work."

In stressing the importance of institutions, it is necessary to distinguish between voluntarily formed private order (soft institutions) and legally enforced public order (hard institutions). Defining the interactions and coordination between soft and hard institutions is an important perspective for understanding institutional change or reform.

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What implications does this approach have on the problem of inequality between regular and non-regular workers? Strong calls are heard for equitable treatment, for instance in terms of paying the same wage for performing the same job. However, even in Europe where an EU directive provide for equitable treatment of part-time and fulltime employees, as well as fixed-term and non-fixed term workers, wage levels for those on fixed-term contracts are 10%-20% lower than for regular workers, even when adjusted for job type and worker attributes. Also, research findings show that approximately 30%-40% of the wage gap between part-time and fulltime workers cannot be explained by worker attributes and other justifiable factors; discriminatory factors continue to exist.

Forcibly introducing hard institutions that mandate equitable treatment would not necessarily result in intended changes in soft institutions that govern people's behavior because it is difficult to ensure their effective enforcement.

In Japan, the revised Part-time Work Act (Act No. 76 of 1993, as amended), effective April 2008, prohibits discrimination in wage, education, and training opportunities or in any other form against part-time workers on the basis of their part-time status provided that their tasks are substantially the same as those of regular employees. However, as the EU directive has not necessarily been successful in delivering its intended results, excessive expectations should not be placed on the revised law.

Rather, the case of the Netherlands might be of greater help. Those employed for one year or more in the Netherlands at a company of at least 10 employees are given the right to freely raise or lower their weekly work hours. In principle, employers are obliged to accept workers' requests and to maintain their hourly wage as it was before any changes.

When workers have such strong rights, employers no longer have incentive to treat part-time and fulltime employees differently in terms of hourly wage or anything else. Even if an employer tries to favor employees of a certain status, arbitrage mechanics come into play in the sense that workers can freely choose their employment status. As such, the perspective of how to create incentive (soft institutions) for companies to ensure equitable treatment among workers, rather than enforcing treatment by means of law, is very important.

The heart of the problem of non-regular employment may lie not in the existence of inequality, but in the excessively high proportion of non-regular workers, who have come to account for one-third of all employees in Japan, exceeding by far the appropriate level. If this situation continues, "social cohesion," a key foundation upon which economic society is sustained, could be undermined. As of 2005, among the Organisation for Economic Co-operation and Development (OECD) member countries Japan's share of part-time workers, both male and female, ranked third highest, and the share of those on fixed-term contracts among female workers second highest.

Japan's numbers appear unnatural because the highest ratio of part-time workers is observed in such countries as the Netherlands and Australia, where equitable treatment among employees is ensured. Also, a survey conducted by the Ministry of Health, Labour and Welfare found that roughly 20% of non-regular workers, whether part-time or fixed-term contract, are unhappy with their current non-regular status, which they did not choose, and hope to be converted to regular status. Nor is it natural that primary income earners for their families have no choice but to take a non-regular position.

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In order to lower the share of non-regular workers to, for instance, one-quarter from the current one-third, a mechanism needs to be established in which non-regular workers receive opportunities to change to regular status if they so desire. In Europe, active discussions are taking place as to whether experience gained as a fixed-term contract worker or temporary worker from a staffing agency provides stepping stones for appointment to a regular-status position.

In order to promote the switching of workers from non-regular to regular, the walls dividing the nation's labor market into one market for regular workers (internal labor market) and another for non-regular workers (external labor market) need to be lowered to encourage movement between the two segments and bring arbitrage mechanics properly into play. This will remove non-regular status as a form of employment always financially advantageous for employers, and naturally bring about more balanced treatment for non-regular workers.

Correlation between Layoff Restrictions and Fixed-term Employment of Women

According to OECD analysis indexing the strictness of layoff restrictions, Japan's layoff restrictions for regular workers are classified as relatively strong but for fixed-term contract workers relatively weak. In the relation of the strictness of these two areas for Japan ranks quite high; fourth among OECD countries. A strong correlation between the strictness of layoff restrictions for regular workers and the share of fixed-term contract workers, a large share of whom are women, is observed internationally (see above chart). Thus, stringent layoff restrictions have undoubtedly been one reason why the share of non-regular workers has risen to the high level they are at today.

Spain has had similar experiences; its share of fixed-term contract workers reached a high of around 35%, which brought a host of adverse side effects. However, subsequent implementation of reform, such as reducing protection for regular workers and providing incentive (subsidies, etc.) to companies hiring young people as regular employees, has successfully addressed the problems. Reform measures such as these, intended to lower the walls between the separated market segments, should be seriously considered in Japan.

>> Original text in Japanese

*Translated from the original Japanese Keizai Kyoshitsu column published in the May 13, 2008 issue of the Nihon Keizai Shimbun.

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